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Supreme Court upholds class action waivers in arbitration agreements

Last week, the United States Supreme Court decided American Express v. Italian Colors Restaurant and affirmed the right of parties to agree to class action waivers in arbitration contracts.

The underlying dispute between the parties involved alleged antitrust violations stemming from American Express' "Honor All Cards" contract, which required participating restaurants to accept both American Express credit and debit cards — the latter of which carried higher fees. The plaintiffs claimed the contract imposed an unlawful tying arrangement in violation of federal antitrust law. The contract also contained an arbitration clause that: (1) required all disputes between the parties to be resolved by bilateral arbitration, and (2) said no claims could be arbitrated on a class action basis.

The plaintiffs contended that because hiring an economic expert would cost more than any individual claimant's potential recovery, the only feasible way to seek vindication would be for the proceeding to be conducted on a class-wide basis. For that reason, the plaintiffs urged that enforcing the class waiver of the arbitration agreement would effectively preclude pursuit of their federal antitrust claims.

After the plaintiffs filed suit in federal district court, American Express moved to compel arbitration pursuant to the Federal Arbitration Act, 9 U. S. C. §1 et seq. The district court dismissed the suit, and the plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit.

A panel of the Second Circuit eventually reversed the dismissal, agreeing with plaintiffs that the class action waiver was not enforceable. The Second Circuit distinguished recent Supreme Court decisions of AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) and Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S. Ct. 1758 (2010) — both of which upheld mandatory bilateral arbitration clauses against challenges — on the grounds that they involved state law claims (rather than federal) and because neither case involved a plaintiff who lacked the economic means to bring his case other than as a class action.

American Express sought rehearing en banc, but the Second Circuit denied the petition. Several judges dissented from that denial, observing that the panel’s attempts to distinguish Concepcion and Stolt-Nielsen were unconvincing and that arbitration agreements should be enforced as written under the FAA. The dissenting judges further explained that the panel had adopted positions that were expressed by the dissenting justices in Concepcion, and thus, rejected by the Court’s majority. The dissenting judges also noted that the panel’s decision was in direct conflict with decisions from several other circuits that enforced class action waivers in similar disputes.

The Supreme Court granted certiorari to review the Second Circuit’s decision. Justice Sonia Sotomayor, who was a member of the Second Circuit panel that heard the case, recused herself from the Supreme Court proceedings.

The Court's Ruling

In a majority opinion authored by Justice Antonin Scalia, the Supreme Court held by a vote of 5-3 that Concepcion and Stolt-Nielsen control. Therefore, the contractual waiver of class arbitration is enforceable. The Court further noted that while it has previously commented in dicta about "effective vindication" of statutory claims in arbitration, there is a difference between a claim being too expensive to prove, and a claim being too expensive to pursue. Because the alleged expenses here (i.e., the costs of an expert) implicated the former — and would be the same whether the case proceeded in court or in arbitration — plaintiffs were not being denied the right to pursue their claim (i.e., costs of filing a lawsuit), the Court said. The Court pointed out that Rule 23 class actions did not even exist for lawsuits in federal court until long after the Sherman Act was passed in 1890, and that no one could contend that the Sherman Act lacked any means of "effective vindication" until the advent of modern Rule 23.

The analysis in the majority opinion begins with the text of the Federal Arbitration Act, which reflects "the overarching principle that arbitration is a matter of contract." Accordingly, courts must "'rigorously enforce' arbitration agreements according to their terms," including the contractual terms describing "'with whom'" to arbitrate and "'the rules under which that arbitration will be conducted.'" In this case, as the majority opinion explains, enforcement of the class action waiver does not contravene substantive federal statutory policy: "the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim."

As in several prior cases, the majority opinion further elaborated on the practical differences between bilateral and class arbitration. In this regard, the Court noted that class arbitration "'sacrifices the principal benefit of arbitration — its informality — and makes the process slower, more costly, and more likely to generated procedural morass than final judgment.'" In contrast, the now-reversed Second Circuit holding would have imposed a "judicially created superstructure" of expensive, protracted skirmishing "before a plaintiff can be held to contractually agreed bilateral arbitration."

Justice Scalia's majority opinion was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito. In addition, Justice Thomas wrote a separate concurring opinion stating that result is compelled by the plain meaning of the Federal Arbitration Act.

In a dissenting opinion (joined by Justices Ruth Bader Ginsburg and Stephen Breyer) Justice Elena Kagan urged application of a rule that arbitration clauses cannot thwart "effective vindication" of statutory rights by such devices as requiring overly high fees for entry into arbitration. In Justice Kagan’s view, the majority opinion could allow a party to make it impossible for a contractual partner to bring a Sherman Act claim against it. She opined that (among other things) an arbitration agreement could impose an absurdly short statute of limitations to bring a claim, could bar the use of economic expert testimony altogether, or require the defendant's CEO to preside over any arbitration hearing. She also commented that the arbitration agreement in this case would preclude plaintiffs from any form of cost-sharing among themselves — not simply utilization of Rule 23 procedures.

The American Express decision may be construed as a victory for freedom of contract. Along with other recent Supreme Court holdings on class arbitration issues, the result also indicates that a majority of the Court believes that the freedom to agree to arbitration provisions carries with it the responsibility to draft those provisions carefully, precisely and unambiguously. Subsequent cases will have do deal with some of the alternate scenarios mentioned by the majority and dissenting opinions, permutations that were not presented in this case. In some respects, therefore, the outer boundaries of class action waivers will be calibrated more finely in the future. But American Express provides a valuable roadmap to the analysis that will guide that process of achieving the long-recognized benefits of arbitration: lower costs, greater efficiency, speed and the ability to choose expert adjudicators to resolve specialized disputes.

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